Monday, May 9, 2016

What the Defend Trade Secrets Act Means for Trade Secret Defendants

The Defend Trade Secrets Act of 2016 (DTSA)—arguably the most sweeping change to the nation’s intellectual property laws in a generation or more—is about to become law. The bill recently passed both houses of Congress with overwhelming bipartisan support. President Obama is certain to sign the bill into law.

Much has already been written about the powerful new tools the DTSA gives to businesses looking to protect their trade secrets. Dennis Crouch, who has been covering the DTSA extensively, recently commented on those tools here, and I have written about them here. Most notably, the DTSA allows a trade secret owner to seek to have law enforcement officials seize property—without advance notice to the accused—to prevent dissemination of the trade secrets at issue.

But how do defendants fare under the DTSA? For example, suppose a business accuses its former employee of taking a confidential customer list or technical information when the employee left the company, and files suit under the DTSA. Or suppose another company hires someone accused of trade secret theft, and the person’s former employer sues the company for conspiracy under the DTSA. What does the DTSA mean for the accused?

Without a doubt, the DTSA gives some advantages to trade secret owners. But it also contains protections that defendants should take advantage of. These include a process for challenging an improper seizure of property, employment protections in the event of an injunction, and recovery of attorney’s fees for actions brought in bad faith. In the right circumstances, these provisions could give a trade secret defendant the upper hand.

Challenging an Improper Seizure

Under the DTSA, a person may have a laptop, server, storage device, papers, or other property forcibly taken into custody without advance notice. Litigants must keep in mind that this is an extraordinary remedy. Before seizure can be ordered, the applicant must show, among other things, that the accused person would evade an ordinary injunction and that the accused person would destroy or hide the property if given advance notice.

A key aspect of the DTSA for defendants is its requirement that a hearing be held within seven days of a seizure order, unless otherwise agreed by the parties. At the hearing, the trade secret owner will have to prove the facts and law necessary to support the order. This hearing can provide a chance for the defendant to set the tone of the case by attacking the trade secret owner’s position and possibly getting the seizure order dissolved. The DTSA also expressly permits modification of the usual time limits for discovery “to prevent the frustration of the purposes” of the seizure hearing. For the defendant who acts quickly, this may mean that expedited document production or even a helpful deposition could be obtained in advance of the seizure hearing.

Employment Protection

Injunctions sought in trade secret cases frequently involve restrictions on employment. For example, where a former employee is accused of misappropriating trade secrets, the former employer may try to obtain an order enjoining the person from disclosing the trade secrets to a competitor, using the trade secrets in service of a competitor, or even working for a competitor at all. Under the DTSA, an injunction to prevent actual or threatened misappropriation may not “prevent a person from entering into an employment relationship.” Moreover, any conditions that an injunction may place on a person’s employment may not be based “merely on information the person knows.” Instead, there must be evidence that the trade secret information at issue will actually be misappropriated. Counsel for the accused will of course seek to avoid any injunction. But where one is entered, counsel should ensure that these requirements are strictly followed.

Attorney’s Fees for Bad Faith

Finally, the DTSA provides that the accused may recover his or her reasonable attorney’s fees from the plaintiff if (among other things) the claim of misappropriation was made in bad faith. While existing state laws generally contain similar provisions, the DTSA is unique in adding expressly that bad faith “may be established by circumstantial evidence.” This is significant given that direct evidence of bad faith—say, an admission by the plaintiff that the claim was without merit—can be exceedingly difficult to obtain. One place to look for evidence of bad faith would be the affidavits submitted by the plaintiff in connection with an application for ex parte seizure.

In short, while the DTSA tightens the screws for those accused of trade secret misappropriation, it also contains important provisions allowing defendants to challenge improper claims and to limit their impact even where relief may be granted.